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How To Read What The Stock Market Is Doing

Updated on October 14, 2011

What Would Your Answer Be?

If you were asked what the stock market did today, what would you answer? Most would answer according to the picture that I've posted, "The S&P was up 20.92 today." But is that the right answer. Think about if for a moment. Is that an accurate answer?

For a trader it is not. There are literally thousands of stocks that comprise the US markets yet the S&P 500 only guessed it, 500! If your answer dealt with the DOW then your answer is only talking about 30 stocks.

Many will look at the S&P 500 as a proxy for the market, but in truth in order to be a part of the S&P 500 your market cap has to be at least 5 Billion. There are some great companies in the S&P 500, but as a trader are these the typical stocks that you would trade? If not, you need to consider more information.

What Is The Stock Market

The stock market is comprised of 41 specific sectors. Each of these sectors will break down into smaller units, but with the basic 41 sectors you literally have 41 different stock markets within the overall stock market.

The S&P 500 can be trading up in a strong trend while specific sectors are tanking. So consider for a moment that you are long a position while the S&P is increasing, but the stock you are trading in trading down strongly. You may be wondering why you are losing money. While trading with the trend is always a good idea, you have to know what the trend really is.

Consider for a moment the S&P 400. These are comprised of mid-cap stocks or the NYSE which has nearly 3,000 stocks. What typically happens is smaller companies move quicker then larger companies so you could have the majority of stocks trading lower while a handful of larger stocks trading higher.

In this scenario you could have the overall market moving higher while the stocks you are in moving lower. Because these indexes are weighted indexes then you can have only a handful of stocks trading higher and the majority trading lower and still have the market move up.

Therefore, the stock market consists of what the general direction of all stocks are doing. If you don't learn how to read the movement of the internal market (what the stocks are doing within the index) then you can easily be on the wrong side of the trend.

Look below at the next picture which shows the weighting of the Dow 30. A handful can easily control the overall index. Notice that the top 9 stocks is weighted over 50% of the entire index. If 15 of the companies in the DOW traded up, but the remaining 15 traded down the DOW would most like post a gain for the day. Is the market going up or is it going down?

Reading The Market Correctly

If you really want to become a successful trader you need to learn how to read the internal market. Notice in the next picture, which is a bell curve of the all 41 sectors. You will notice the percentages at the bottom. The percentages represent the percentage of stocks within each sector that is on a point and figure buy signal. Therefore, if a sector is in the 30% column only 30% of the stocks within that sector are on a P&F buy signal or 70% of the stocks are on a sell signal.

You will also notice a "+" or a "-" on the left side of each box. This indicates that the P&F is currently in a column of "X" or a column of "O's". If you don't understand P&F charts simply click on the link to one of my other HUBS which explains this.


While this HUB does not go into depth on the internal market, my point is that there is a lot more to whether stocks are moving up or down. This is important if you want to be a consistently profitable trader. Finding stocks within sectors that are moving in the same direction as the overall trend is a powerful tool for traders.

In addition, understanding what the internals are doing can also give you insight when a reversal of a trend is coming. The majority of stocks are smaller weighted, but they turn quicker then the large caps. When the majority of the market is shifting direction it can put you on guard to capture the next big move.


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